Price-gouging

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Price Gouging Part Two

When you are only concerned with one thing and have only one tool things can go awry quite easily.  So it is with our price theory friends.  They bask in the rigor of their thinking and look askance at the inability of regular folks to grasp the point of the logic of their so-called price mechanism — note the mechanical nature of it all.  The recent spate of snooty commentary aimed at Kamala Harris and her ideas about price gouging are a case in point.  I talked about this a couple of days ago with respect to John Cochrane’s typical in-your-face article praising price gouging.  Cochrane typifies the defiance of a certain sort of economist.  They take pride in being determinedly anti-social and cast aspersions on anyone who dares to cross swords with their wisdom.  Ignorance.  Gimmick.  Populist.  These economists are not short in vocabulary when someone treads heavily on their precious logic.

Which is all it is.  Logic.  Impervious to reality, but impeccable in its coherence.  

The current controversy gives us an opportunity to look a bit more carefully at the shortcomings of economics and its obsession with what it calls markets.

One victim of putting all your emphasis on prices and their formation as the be-all and end-all of economics, along with the equilibrium that is claimed as the result of the suitable matching of supply and demand produced buy the movement of prices is production.

Economics has no theory of production.  

As I have mentioned here before, some go as far as to claim there is no such thing as supply.  There is only demand.  This lunacy is entirely supportable by the logic of price theory.  Which is why price theory is a tender branch on which to balance the entire load of an economy.

You think I exaggerate?

Then allow me to refer you back to one of the primary sources of the current error.  The snootiness  began some time ago.  The arrogance set in during the 1930s.

Robbins, writing in 1932 about the application of what he refers to as the “new approach” — which is the relentless application of what we know as price theory to each and every nook and cranny of an economy, says the following:

“We may take as an example of the advantages of this procedure the modern treatment of organization of production.  The old treatment was hopelessly unsatisfactory: a few trite generalizations about the division of labor copied from Adam Smith, and illustrated perhaps by a few examples from Babbage; then extensive discursions on industrial “forms” and the “entrepreneur” with a series of thoroughly unscientific and question-begging remarks on national characteristics — the whole wound up, perhaps, with a chapter on localization. … “

Tell us what you think Lionel!  Who goes on:

“There is no need to dwell on the insufferable dreariness and mediocrity of all this.  But it is perhaps just as well to state definitely its glaring positive deficiencies.  It suggests that from the point of view of the economist “organization” is a matter of internal industrial … arrangement. … “

This is a polemic, so Robbins eschews the need to provide examples of all this shoddiness.  His point is unequivocal though.  It screams through his language:  There is one and only one source of organization in an economy: the price mechanism.  The structure of a firm, like everything else in the eye of price theorists, is a direct consequence of the playing out of prices.  

When you only have a hammer …

Unless you missed the point Robbins carries on:

“In the modern treatment, discussion of “production” is an integral part of the theory of equilibrium.  It is shown how factors of production are distributed between the production of different goods by the mechanism of prices and costs…. The doctrine of division of labor, heretofore so disagreeably technological, becomes an integral feature of a theory of moving equilibrium through time.  Even the question of “internal” organization and administration now becomes related to an outside network of relative prices and costs; and since this is how things work in practice, what is at first sight the greater remoteness of theory in fact brings us much nearer to reality.”

Please stop laughing.  And I apologize for the extensive quotations.

Robbins is dismissing any need to develop a theory of production because everything falls under the rubric of prices.  In a sweeping and quite extraordinary way Robbins lays down a marker for all subsequent price theorists.  Nothing else matters.  Nothing.  Only the logic of the price mechanism.

Notice the slippery way he avoids the question of what to produce.  He simply says that resources are distributed amongst the different goods to be produced by the interplay of prices and costs.  But who decides what to produce?  That’s a decision that precedes such interplay.  For prices and costs to have an effect, they have to have an effect on something.  How does that something appear on the stage?  By magic?  There is no room for invention, innovation, or any other form of novelty in Robbins’ telling of the story.  He simply argues that prices and costs allocate resources amongst things that already exist.  His equilibrium and his logic are utterly incapable of explaining why economies change or why new products come into existence.  His theory and its successor versions are simply a logic, elaborately extended, that seeks to explain an entirely sterile view of market exchange.  

Nor can he shed light on how to produce something.  He dismisses such talk as “disagreeably technological”.  

No wonder economics has subsequently fumbled around with theories of the firm.  When you dismiss organization as being trivial and production as being only an extension of the allocation of resources subject to prices and costs beyond the boundaries of a firm, you disable any sensible or searching inquiry into such organization.  

This crippling of economics and its turn into a narrow study of the logic of exchange rules out vast swathes of economic activity.  It reduces the relevance of economics to a sliver of the entire process of invention, production, consumption, and decomposition of the products that flow through a modern economy.  

When you only have the hammer of the prince mechanism, everything does begin to look like demand.  You have dismissed the issues of supply as uninteresting and of no consequence.  

Price theory, in its most logical form, is simply a method to study allocation of things that already exist and in places that already exist.  It stands mute on novelty.

Which is why Cochrane can claim that price gouging is a good thing.  Why?  Because the existing supply is allocated best when that last unit to be sold goes to the highest bidder — in Cochrane’s story it was the last available room in a motel.  In the mind of an economist “scarcity” has been eliminated and an optimal allocation achieved.  In the mind of everyone else, because no new supply has been called forth, the scarcity persists and the high price used to allocate that last product, deviating as it does from preceding or “regular” prices, is price-gouging at its worst.  

In another setting, the bias of price theory becomes an ideological focus when a politician like Harris dares suggest that, perhaps, the discussion of how to deal with inflation has more than one leg to it.  Traditional economics places the entire burden on fighting inflation on demand.  Rising inflation requires, in this telling, dampening down demand.  In the real world this means making some portion of the working population unemployed and reducing wage increases.  This follows precisely from the sort of analysis that price theorists use.  After all, following Robbins, they have no insight into production and thus no insight into supply.  As some of them say: there is only demand.  In this case that demand emanates from pesky workers.

Parenthetically, there is a tawdry irony at play here: tenured academics lecturing us all on the importance of flexible labor markets and the need to adjust to locate an equilibrium seems somewhat hypocritical.  They seem able to ignore this without too much self-awareness though. 

So the suggestion that some attention ought be given to the supply side of the equation is met with ribald laughter from the price theory crowd.  Their protestations of ignorance and meddling on the part of silly politicians is based on the security of their logic.  After all if there is no supply and only demand, and if production is subsumed as part of the market, it is folly to suggest taking a look at supply.  It doesn’t exist!

Which is convenient for the producers.  They don’t have to share in the pain of dealing with inflation. The economic experts say so.

Robbins blazed the path in more than one way.  Notice how that last long quote ends.  He applauds the dismissal of production and all that disagreeable technology and goes onto claim that such dismissal, far from being an odd result of some distant and abstract theory, actually moves his analysis into accord with reality.

Yes, reality.  As perceived by economists.

And that is where we find the best insight into how economics can sometimes appear absurd.  Robbins actually imagines that elimination discussions of production makes economics more realistic.   After all when you latch onto prices as the only matter of consequence in an economy, and when you laud the inevitability of equilibrium as it optimal achievement, your view of reality has become sufficiently distorted that you can actually say something like that.  The psychologists must have theories of their own to explain this syndrome.  The Brest of us just call it weird. 

Likewise Cochrane actually believes that scarcity has been erased by the extraordinary pricing we call price gouging despite not a scintilla of new supply being created.  

It’s all relative.  And its all inevitable.  The logic is solid.  Surge pricing is good for us.  We must accept the consequences of our arrival at equilibrium.  Our price theorists know a thing or two about reality.  

Well, maybe.

One last thing.

I believe it was John Holland — not a price theorist obviously —  who said that when a thing is in equilibrium it is dead. 

He’s correct.  Does that mean that price-gouging is good only in dead economies?

Asking for a friend.

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Those quotes above are from Robbins’ “An Essay on the Nature and Significance of Economic Science”

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Cochrane on Price Gouging

Price-gouging is now a topic in politics.  Kamala Harris has put it there.  Naturally there has been the predictable outcry of opposition coupled with and equally predictable sneer of disapproval: how could she say something so uneducated?  Has she no grasp of Econ.101?  Oh the illiteracy!

Perhaps even more predictable is that someone like John Cochrane has felt it necessary to write an article in praise of price-gouging.  After all, hard core libertarian economists are proud of their adherence to the often counter-intuitive claims of economic price theory. 

In his words:

“We should praise price-gouging. Yes, pass a new federal law, one that overrides the many state laws against price gouging.”

There’s not much to say.  From within the straightjacket of price theory economists have no ability to comment on the morality of a price.  It is, as they say, what it is.  Provided that said price is a consequence of the playing out of the logic described in economics.  

It all has to do with scarcity.  As Robbins famously put it:

“Economics is the science which studies human behavior as a relationship between ends and scarce means which have alternative uses.”

That sentence, first written in 1932 in his “Essay on the Nature and Significance of Economic Science”, has been littered throughout economic literature ever since.  It has become the iconic definition of what economics is about.  

Robbins was, we must all recall, engaged in hand-to-hand combat at the time in an attempt to give economics a definition that was resistant to what he saw as fallacious efforts to expand it into discussions of material welfare.  Such things were, he argued, beyond the remit of economic logic.  In fact in his ardor he sometimes comes across as quite haughty in his dismissal of people who wanted to broaden economics.  It was to him both futile and ignorant to undertake such a task.  It could reveal no laws.  It was doomed to wallow in vagueness and unnecessary conversation.  No.  In order for economics to be truly scientific, economics had to be entirely neutral with respect to the ends to which resources were allocated.  Indeed, “economics is not concerned with ends as such”.

Since Robbins economics has no morality.  

Within this restriction price-gouging is a good thing.  No, really.  Sudden spikes in prices are simply logical or rational responses to equally sudden changes in the relationship of supply and demand.  Whether it is a loss of supply or a surge in demand is irrelevant.  The result is the same.  The relationship needs to be restored.  The gap between supply and demand may be fleeting, but the logic is inexorable. 

Cochrane gives the example of his experience in locating a hotel room on an evening where a local concert had absorbed most of the hotel capacity and he ended up paying $400 for a room that usually went for $50.

And he loved it.  His mother was, apparently, less impressed.  She felt aggrieved.  Angry even.  And this despite being, according to Cochrane, “amazing, smart, wise, and well-travelled.”  Clearly uneducated, though, at the level of Econ. 101.  

Cochrane applauds the hotel owner for the surge pricing and ends his article by saying:

“It is surely morally worthy to give what you have to your neighbors in time of need, especially the less fortunate. But we should not demand gifts. And appropriation of property by threat of force, turning off the best mechanism we know for alleviating scarcity, does not follow. Moral feelings are a terrible guide for laws.”

We can imagine Robbins smiling at that last sentence.  Moral feelings are a terrible guide for economic laws.  Don’t forget Robbins wants economics to be scientific in the manner of physics, and no one suggest that the laws of physics have a moral basis.  This is why critics of economics are so sniffily set aside by economists.   Those critics make the mistake of imagining that economics has a moral core.  Or that it can comment on the efficacy of the distributions that its logic suggests are “optimal”.  

It cannot.  It is morally crippled by its method and its conception of human behavior.  Economists can make a statement supporting “the best mechanism we know for alleviating scarcity” without having to reflect on the deeper meaning of those words.  The original scarcity still exists.  There is no additional supply.  All that has happened is that demand has been restricted to match the existing supply.  The new price reflects this restriction.  Because there is a new matching of supply and demand, albeit briefly, scarcity, in the eye of economists, has been “alleviated”.  The inescapable logic of price theory produces such a blinkered view.  

This logic can sometime be thought of as being inhumanly rational.  But Robbins was quite nuanced on this.  Towards the end of his essay he says this:

“This, then, is the sense in which economics can be truly said the assume rationality in human society.  It makes no pretense, as has been alleged so often, that the action is necessarily rational in the sense that that the ends pursued are not mutually inconsistent. … It relies upon no assumption that individuals act rationally.  But it does depend for its practical raison d’être upon the assumption that it is desirable that they should do so.”

In other words, economics does not assume people are rational — it just wishes they were so that its logic would then reflect reality.

Parenthetically, it is the blind pursuit of this logic that leads to severe limitations for economists.  Robbins, for instance, devotes a lot of space in his essay to explaining why it is both impossible and not desirable for economics to have a deep theory of production.  Economists can live in splendid indifference to the “arts” of organization because the only relevant “theory” of production allowed into economic discourse is that governed by price theory.  This is why, I suggest, economics has had such a hard time responding the famous Coase challenge: Why do firms exist?  The eventual solution to his challenge was to recapitulate the problem as one of costs and not organization.  This allows it to be brought back under the rubric of price theory untainted by the thoughts of those who might imagine organization itself was worthy of study.

More recently I came across the even more radical suggestion by an eminent price theorist that there is no such thing as supply.  There is only demand.  This is an example of the absurdity of blind logic.  Apparently, according to this view, manufacturers only sell their products because a consumer has a higher demand as expressed in a willingness to pay a price that overcomes the manufacturer’s own demand to keep hold of the product.  This, as I have pointed out before, suggests that Ford Motor Company only manufactures vehicles because it likes to collect them.  It only sells them when a consumer offers a price it cannot refuse.  

When you have no theory of production you can twisted up in your logic like this.

In the words of Tim Walz, these people are weird.   

Which brings us back to the election and the Harris comment on price-gouging.  Our libertarian friends have eagerly taken up the challenge and are decrying her lack of sound economic logic.  She is, we are told, economically ignorant.  Her policies are merely “populist” and lack sound economic judgement.

So, at this point I feel the necessity to use another comment in the Robbins essay.  This towards the end, so perhaps our libertarian friends didn’t get that far in their reading.  The comment is this:

“This is why in countries where the level of education in economics is not high, there is a constant tendency to the approval of more and more protective tariffs.”

In the interest of maintaining that famous neutrality economists so pride themselves on, I look forward to the Cochrane article critiquing Trump’s evident economic illiteracy. 

I am waiting …